Risk Management
Position Sizing
Calculate how many units to trade so that a stop-loss hit never costs more than a fixed percentage of your account.
Key rules
- Risk a fixed % of account per trade (typically 0.5–2%)
- Position Size = (Account × Risk%) / (Entry − Stop Loss)
- Never increase position size to 'make back' a loss
- Use stop distance to determine lot size — not the other way around
- Risk percentage should stay constant regardless of conviction level
Position sizing is the process of determining how many units (shares, contracts, lots) to trade so that if your stop-loss is hit, you lose no more than a predefined percentage of your account — typically 0.5% to 2%.
**The Formula** ``` Position Size = (Account × Risk%) / (Entry − Stop Loss) ```
**Example** - Account: $10,000 - Risk per trade: 1% ($100) - Entry: $150.00 - Stop Loss: $147.00 (risk per share = $3.00) - Position Size = $100 / $3.00 = 33 shares
**Why It Matters** Without position sizing, one large loss can wipe out many small wins. Consistent position sizing ensures no single trade can significantly impair your account, and keeps your equity curve smooth.
**Variable Risk** Some traders reduce their risk percentage after a losing streak and increase it during a winning streak (the "anti-martingale" approach). More commonly, traders use a fixed percentage risk for consistency.
**Common Mistakes** - Letting your stop distance determine your position size is correct - Using a fixed number of shares regardless of stop distance is wrong (larger stops = larger losses)